How to Minimize Your Investment Losses in the Next Recession

By Jim Walker on Monday, October 15th, 2018 |
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The current volatility in the US stock market is reminiscent of the days preceding both the dot com crash and the 2008 market crash that ushered in the Great Recession. It may well be time to consider how to minimize your investment losses in the next recession. The 2008 crash destroyed about $7 trillion in equity value. A crash today might destroy as much as $20 trillion in equity value according to Investopedia.

The recent stock market retreat, which has sent the S&P 500 Index (SPX) down by 5.9% from its intraday high on Oct. 3, has intensified the debate between the bulls and the bears. Outspoken economist, hedge fund manager and market analyst John Hussman is renewing his prediction of a severe market crash that would send major U.S. stock market indices plummeting by 60% or more. He has been warning that stock valuations have been extreme for years, and long overdue for a return to historical norms. Putting this in dollar terms, Hussman recently said that the crash will wipe out $20 trillion of stock market value, Business Insider reports.

Timing a market correction is always difficult. Bears have been predicting this bull market’s demise for years! But all good things do come to an end and that includes rising stock market prices.

They suggest that bonds will start outperforming stocks as much as a year before the market actually crashes. Rotating some of your profits out of stocks into bonds is their recommendation.
Cyclical stocks will take more of a hit than defensive stocks when the market heads south. Their suggestion is to start moving money out of some of your recent cyclical stock winners into long term growth stocks.

Growth stock prices are based on their earnings. When earnings drop off the stocks without a margin of safety will fall more rapidly than the general market. These folks suggest moving out of growth stocks and starting to buy value stocks.

And, things will get worse in developing markets, especially those economies afflicted by the “resource curse.”

Is This the Time to Buy Gold?

Investing in gold can be profitable if you pick and choose carefully when to buy and when to sell. We wrote about this in 2010.

There are a number of attractive options for investing in gold and there are pitfalls. Gold stock investing includes mining companies and derivatives. Many gold bugs will say that how to invest in the stock market during hard economic times is to invest in gold. However, the true gold bug will advise that you buy and hoard gold bullion or rare gold coins.

When we wrote this, gold was trading at about $1,400 an ounce. It rose for a couple of years to trade briefly in the $1,900 range before falling. Today gold trades at about $1,200 an ounce. The best time to buy gold was in the early 1970s during a period of historic inflation brought on by new social spending and the war in Vietnam. The next best time was in 2000 when interest rates plummeted and war raged in the Middle East. In each case, the price of gold steadily rose until economic conditions improved and it became contra productive to hold an asset that has quit appreciating and did not pay dividends or interest.

ow, however, might be a good time to balance your investment portfolio with a gold ETF or mining stock with the understanding that you will hold the investment for a few years and then rotate back to equities, bonds, or even cash.